Most of the country is experiencing a strong sellers market. A sellers market is defined by the amount of inventory, or available homes, there are. Any time the inventory levels go below 5 months it’s a sellers market.
A balanced market is 6 months of inventory, meaning if no new homes came on the market, the current absorption rate by buyers would have all of the available homes sold in 6 months. Higher than 7 months of inventory is a buyers market.
In many areas across the country we’re seeing inventory levels around 2 months, or even less. Meaning there are fewer houses available than those that want to buy them.
For investors it’s been a similar story. Apartment buildings are selling for some of the lowest cap rates I’ve ever seen, and there’s no signs of this stopping.
Many investors are asking me if they should wait out this hot market, or just accept reality and pay a premium for properties hoping things continue.
In my opinion, what the market is doing doesn’t really change my strategy. The only difference is fewer deals and more competition.
In this article I want to share with you my tips on how to find properties that generate a much higher return on investment.
Focus On Multi Family Properties
It’s really difficult, if almost impossible, to find a city in the US where you can cash flow $1000 per month from a single family home.
However, it’s pretty common with small multi-family properties.
Multi family properties allow you to generate multiple income streams under one roof, and you also benefit from only using one loan spot. We all have the ability to secure up to 10 Fannie/Freddie conventional loans, and I’d much rather use those loan spots for more than ten units. Instead I can have ten properties or ten loans with 20 units.
Multi family properties such as duplexes will usually rent for a little less than a similar sized single family home, but the per unit price is considerably less.
In my local market of Seattle, most duplexes in the outlying areas are selling for between $350,000 – $400,000. This equates to a per unit price of between $175,000 – $200,000.
You would not find single family homes in these same areas for this price, unless they needed a ton of work.
Look For Value Add Opportunities
Value add properties are investment opportunities that require some work to be done in order to generate a higher return. Examples of this would be in the form of a renovation, and/or in increasing the rents. There are properties out there that do not need work, though the rents are considerably below fair market which would most likely require moving the existing tenants out and re-renting at a higher rate.
Do Your Own Research On Fair Market Rents
Every single investment property I’ve purchased came with rents that were much lower than what fair market rents are.
It can be difficult to know when you’re searching properties online if the rents are where they should be, or if they are considerably less.
The best advice I have is to really get an idea of what rents are in the area you’re looking. I take a two step approach.
The first step is seeing how many available rentals are currently advertised in the city I’m looking. If there are only a few rentals available, chances are rents will be much higher.
The next step is doing some research for rental rates on similar properties that have rented. You can use websites like rentometer.com, Zilpy.com, and zillow to look at properties that have recently rented and what they rented for.
Once you have an idea of what the maximum rents you can charge, now you need to decide what the property needs in order to get those higher rents.
A Small Renovation Will Help Achieve Higher Rents
Pretty much every good deal will need some renovations. Even flooring and paint can go a long way, so be sure to budget a few thousand for each property up front.
If the kitchen cabinets are old and falling apart you may want to consider spending more and having new cabinets and counter tops installed. We’ve gotten it down to just a few thousand dollars for each new kitchen renovation, and we use the same cabinets and same granite slab counter tops which will last for years.
Not only will a renovation up front help you rent the property for more, but it will lessen the amount of repairs in the future, renovations are a write off so you’ll enjoy some tax savings, and it will increase the value of your property.
To give you some real life examples of how I use this strategy to achieve a higher than average return on investment, below are three case study examples of properties I’ve purchased in the last year.
Case Study #1
Purchase Date: December 2016 Renovations: $19,200
Location: Greenwood, IN Total Initial Investment: $62,950
Purchase Price: $155,000 Current Monthly Rents: $2,235
Down Payment: $43,750 Monthly Cash Flow: $1,119
Return On Investment: 21%
Case Study #2
Purchase Date: February 2017 Renovations: $10,198
Location: Mount Vernon, WA Total Initial Investment: $65,948
Purchase Price: $203,000 Current Monthly Rents: $2,250
Down Payment: $55,750 Monthly Cash Flow: $1,072
Return On Investment: 19.5%
Case Study #3
Purchase Date: April 2017 Renovations: $5,800
Location: Mount Vernon, WA Total Initial Investment: $69,800
Purchase Price: $236,000 Current Monthly Rents: $2,400
Down Payment: $64,000 Monthly Cash Flow: $1,154
Return On Investment: 20%
Case Study Recap
These three property purchases have added an additional $82,620 in income to my rental portfolio and $40,140 in annual cash flow.
I receive an average of a 20% ROI of these acquisitions, which means in 5 years I will have recouped my initial investment (this is before factoring in tax benefits, appreciation and principal pay down).
These three properties were listed on the Multiple Listing Service, and all were purchased with investor friendly agents who found these opportunities and shared them with me.
Each property was under rented and needed work.
My point here is that properties that return over 15% are out there. Even with Seattle being one of the hottest markets in the US, I’m still able to find great deals in outlying areas that generate my desired return.
You don’t have to use secret tactics like mailing sellers postcards or door knocking to find great deals, the most important thing is to find an investor friendly agent out there sourcing deals for you, and knowing how to run the numbers and figure out the best strategy to getting the highest rents.
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